28
Thu, Mar
51 New Articles

Montenegro’s Financial Sector, Politics, and The Pandemic

Montenegro’s Financial Sector, Politics, and The Pandemic

Montenegro
Tools
Typography
  • Smaller Small Medium Big Bigger
  • Default Helvetica Segoe Georgia Times

Unprecedented times for the entire world, even more so for Montenegro. Apart from the pandemic that still firmly grips the globe, setting back the economies worldwide, Montenegro has witnessed a huge political shift, as the opposition came to power after narrowly winning the parliamentary election held last year. The victory was hailed by many as the beginning of a new era, expecting the new government to lead this Balkan country toward a more stable and prosperous future. Many changes have been announced, and the financial sector was one of the most talked-about topics.

Due to the negative effects of the pandemic, there has been an increase in public debt, unprecedented from the time of hyperinflation in 1993, while Montenegro was still a part of Yugoslavia. The lack of diversification of dominant business activities made the country even more vulnerable to the crisis, for when the dominant sector is affected, as was the case with tourism in Montenegro, the country’s entire economic stability is in peril.

The COVID-19 pandemic caused a significant strain on the medical system of Montenegro, as well as a drop in activities across all sectors, leading to the closing of numerous companies. The pandemic required constant attention and monitoring of the financial sector by the competent authorities.

The financial market of Montenegro is regulated by the Central Bank, the Insurance Supervision Agency, and the Capital Market Authority, while the Central Securities Depository and Clearing Company is the relevant body regarding trading on Montenegroberza, the only stock exchange in Montenegro.

The Central Bank of Montenegro, apart from its supervisory role, has a central role in the banking system and is tasked with maintaining and improving monetary and financial stability. Additionally, the Central Bank of Montenegro each year advises the government of Montenegro by recommending the necessary measures for improving the economic policy dictated by the government.

This year such advice is more valuable than ever, given the hardships brought on by the pandemic. Tourism, one of the priority sectors in the development of Montenegro and one of the key generators of growth and employment, has been severely impacted and hindered, thus requiring immediate reaction from the financial sector. The banking system, led by the Central Bank of Montenegro, as the dominant component of the financial sector, has to ensure that solvency and liquidity remain solid. This has been achieved through the implementation of measures aimed at mitigating the negative effects on the economy caused by the coronavirus pandemic.

The necessity for maintaining the liquidity and the stability of the banks was recognized and competent authorities took action in order to ensure that the risk exposure is maintained at prudent levels. Given the fact that the financial sector of Montenegro is comprised mostly of banks (over 90%), while insurance companies and monetary financial institutions come in distant second and third places, the importance of keeping all banks liquid was paramount. An increase in the credit potential of the banks was achieved by reducing the mandatory reserve requirement by 2 percentage points, increasing the liquidity of the banking sector by EUR 70 million, according to the data of the Central Bank of Montenegro. So far, the banking sector has proved resilient in spite of the COVID-19 crisis, with banks’ capital adequacy ratio comfortably above the regulatory minimum and the level of impaired loans stabilizing thanks to payment deferrals and loan restructurings. Despite the measures taken, it is realistic to expect an increase in bad loans in the coming period, as a result of the difficulties faced by the real estate sector. Nevertheless, it is not likely that the country’s financial stability would be jeopardized, as the banking system is liquid and solvent.

According to the World Bank’s latest projections, Montenegro’s GDP is expected to grow by 7.1% this year after shrinking by 15.2% last year. However, activity in this tourism-dependent economy will continue to be hampered by international travel restrictions. The government is optimistic and has announced an increase of minimum salaries by 17%. This should lead to minimum salaries amounting to EUR 700 by the end of the next year and, consequently, a considerable increase in the standard of living in Montenegro.

Montenegro continues to strive towards European Union membership, along with the rest of the Balkans, but many challenges still lie ahead. It remains to be seen whether the new government, with its fiscal policy, will improve the current state of the financial sector, and the economy as a whole.

By Igor Zivkovski, Partner at Zivkovic Samardzic Law Office

This Article was originally published in Issue 8.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Our Latest Issue